The European Central Bank's policy dilemma

Pedestrians pass a euro sign sculpture outside the headquarters of the European Central Bank in Frankfurt.

The Federal Reserve is not the only major central bank facing tricky policy challenges. Thursday's monetary policy meeting in Frankfurt will serve as a reminder that the European Central Bank (ECB) also confronts a complex policy dilemma—and this in the context of a general policy direction that potentially widens the disparity in the approaches taken by the two most systemically important central banks in the world.

The major issue facing ECB policymakers relates to the desirability of a new round of policy easing that would involve greater use of balance sheet operations via quantitative and/or credit easing. This would supplement the central bank's forward policy guidance on interest rates.

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The major questions relate to whether, when, how and, most importantly: How effective would it be? And none of them have easy answers.

The immediate catalyst for additional ECB measures, experimental as they are, is the recent downward trajectory in inflation. The particular concern is the potential dampening effect on growth and confidence, together with the risks of an over-appreciated currency—that is to say, the threat of "Japanization."

Opposition comes from the correct realization that the ECB's tools are not the best suited for the tasks at hand. As such, effectiveness is far from guaranteed; and the risk of collateral damage and unintended consequences is not immaterial.

The best that the ECB could reasonably hope for is to put a floor under the region's inflation rate and buy some additional time for the real economy to heal, particularly in peripheral Europe. But this could come at the cost of encouraging excessive risk-taking and resource misallocations.

Moreover, durable gains would depend less on the ECB and more on the prospects for more comprehensive economic policy reforms at both the national and regional levels.

All this puts Thursday's ECB decision-making process in a particularly delicate position—something that President Mario Draghi is likely to cover in his press conference.

Recognizing this, policymakers may well end up punting the major decisions to future meetings, if only in the hope that this would provide them with some additional information on how best to strike an extremely tricky and delicate policy balance.

—By Mohamed A. El-Erian.

Mohamed A. El-Erian, former CEO and co-CIO of PIMCO, is a member of the International Executive Committee at Allianz and chief economic advisor to its management board, chair of the President's Global Development Council, and author of the NYT/WSJ bestseller "When Markets Collide." Follow him on Twitter @elerianm.